Realty firms eye balance sheet repair to cut debt, chase growth

Bengaluru: Top developers are repaying debt and banking on cash flows from new project launches even as potential customers continue to sit on the fence.

Different developers have adopted different strategies to fight the slowdown over the last 18 months or so. “The key thing is to see if developers see a rise in debt levels. If the interest payment outflow, construction and other overhead costs are higher than customer collections, then it will result in negative cashflows, which is the key issue for some companies,” said Sandipan Pal, analyst, Motilal Oswal Securities Ltd.

Some have solely focused on cutting debt and repaying banks; some are looking at project launches and execution to generate quicker cash flow, he said.

Earlier this month, DLF Ltd, India’s largest developer by market value, said it plans to divest around 50% stake each in four new housing projects to private equity (PE) firms for more than `3,000 crore. In a muted sales environment, the move will improve DLF’s cash flows.

“DLF’s strategy is not to sell projects. We are planning to sell equity to PEs. This would help in infusing capital in projects and PEs will gain through strategic investments. It will also enhance project value for customers and a win-win for all stakeholders,” said Rajeev Talwar, group executive director, DLF.

The developer, which has sold and exited several assets and businesses in the last two years, saw net debt rise by around `400 crore in the December quarter to `20,300 crore owing to capex of `190 crore. The interest outgo during the quarter was higher at `840 crore.

With few large launches in 2014-15, DLF will need to launch a number of projects in 2015-16 to keep debt levels under control and look at launches outside the sluggish NCR market, an HDFC Securities Ltd report said in February.

Over the last year, Mumbai-based Housing Development and Infrastructure Ltd (HDIL) has reduced its debt by nearly `685 crore to`3,142.4 crore as of December 2014. Cash flows in the December quarter were in the range of `250 crore, but most of it, like in the previous quarters, were used to pare debt.

“Cash flows are mainly used to pay interest or principal. We want to keep repairing debt and repaying banks till we see a decline in interest rates,” said Hari Pande, vice-president, finance and investor relations, HDIL.

Alongside, the company has also started focusing on project launches and sales. Planet HDIL, a proposed affordable housing township in peripheral Mumbai, will have 75 million sq. ft across 550 acres and will generate ample cash flows for the company in the coming years, said Pande.

“If the company is able to liquidate its unsold inventory in ongoing projects over next two years, we think it will be able to further significantly reduce its debt exposure,” said a February JP Morgan report. “...If HDIL is able to reduce its debt by an additional `7 billion (`700 crore) over the next one year, then not only will it be able to significantly free up cash flows to grow more but also completely reduce all debt refinancing risks.”

“Even if sales don’t pick up in one city, large developers are strategically looking at multiple geographies to spread the risk or are launching projects across the price spectrum. But there are a few which are stressed and need to focus on cleaning their balance sheets,” said an analyst from a Mumbai-based brokerage, who refused to be named.

Developers across cities are gearing up for launches, betting on a sales revival in 2015-16.

Mumbai’s Oberoi Realty Ltd has launched two projects in recent months, and plans more in 2015-16. The firm, which has not had many project launches for some time, expects significant cash flows from the projects.

“Developers need to focus not just on operations but on balance sheet management, because financial discipline is important. We have had a few launches and there are more lined up in 2015-16, including the Tata Steel land we bought. All these projects will be cash-generating and we will use the cash flows mainly for project development and to buy land, selectively,” said Saumil Daru, chief financial officer, Oberoi Realty. He added that Oberoi Realty’s debt equity ratio at 0.15 is lower than industry debt levels, and that if the firm needs to raise debt for a land acquisition opportunity, the balance sheet can easily take it.

Bengaluru-based Prestige Estates Projects Ltd, has a consolidated net debt of `4,000 crore and a debt-equity ratio of 0.7. However, much of prestige’s debt is on its commercial office assets, and since there is rent securitisation—these assets will generate rent—there’s not much stress. Cash flows from its residential projects have provided nearly `900 crore each in the last two quarters.

The strategy for 2015 is to launch a number of large projects in Bengaluru and Hyderabad, said Venkat Narayana, chief financial officer, Prestige Estates. The developer pre-launched two projects in Hyderabad this year, from which it hopes to collect `2,700 crore.

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